S.J. farmland values growing well

As food commodity prices have risen, so has the value of land used to produce the crops.

Reed Fujii

As food commodity prices have risen, so has the value of land used to produce the crops.

Midwest farm values have nearly doubled since 2009, boosted by the price of corn and soybeans, according to recent news reports.

And the interest in farmland, driven by global food demand, with money from institutional, private and foreign investors, as well as farmers looking to expand their operations, is being felt in the Central Valley and San Joaquin County as well.

Although less dramatic than gains seen in other regions, a recent report showed prices rising for nearly all types of farms, except for dairy.

That report, from the California Chapter of the American Society Farm Managers & Rural Appraisers, shows the price of east San Joaquin County cropland rose to $12,000 to $20,000 an acre last year, from $8,000 to $11,000 in 2010. Also, a south county almond orchard that might have fetched $16,000 to $22,000 an acre seven years ago would more likely cost $18,000 to $30,000 in 2012.

Most impressive may be a roughly doubling of cherry orchard prices, to $25,000 to $38,000 in 2012 from $13,000 to $18,000 in 2006.

But San Joaquin County rangeland for grazing has only appreciated slightly, up to $4,000 to $8,000 an acre last year, from $4,000 to $6,000 a few years ago. And dairy cattle in Merced, Stanislaus and San Joaquin counties, have crashed in value, to $650 to $1,950 per head last year from $1,800 to $3,600 a head in 2008.

Global economic forces are behind the change; particularly growth in demand from emerging economies such as China, India and Brazil, said Vernon Crowder, senior vice president and agricultural economist with Rabobank.

"The higher growth of the population and more the urbanization of that population, the higher their incomes, they want to eat more meat, they want more luxury products," he said. "For those reasons, you have more demand for food across the world. That's the big driving force."

As a result, Crowder said, "We're seeing significant appreciation of all farmland across the country."

Generally, California farmland price gains have not doubled, as in the Midwest, but that's because of the diversity of the crops and land types found in the Central Valley.

Price appreciation has been strongest for land with decent soils and available water suitable or planted in permanent crops, particularly tree nuts. Grazing land or property without irrigation has seen only small gains.

It makes U.S. commodities cheaper for foreign buyers; lowers the cost of borrowing money for land purchases; and prompts investors, including institutional buyers such as pension funds and insurance companies, to look to farmland as an alternative investment.

Investors' agents are scouring the market for available farmland, looking for deals even before a property might be listed with a land broker, said Randal Edwards, chief executive of the appraisal firm, Edwards, Lien & Toso Inc. in Hilmar and chairman of the appraisers society panel for northern San Joaquin Valley.

"It's really, really aggressive," he said of the current interest from outside investors. "There's a lot of rah-rah going on there with the tree and specialty crops.

"They're looking to expand their portfolios in something like agricultural properties," Edwards said.

Phil Brumley, an Escalon almond and field crop farmer and agricultural consultant, said the steady and increasing value of farmland contrasts with other real estate investments through the recession.

"You can't say the same thing over the same time for commercial property or industrial property or residential property," he said. "So we've seen a lot of dollars come into agriculture, which historically haven't been headed in this direction."

As a result, farmland prices are nearing or past the point of making a reasonable return.

For example, top-end almond land at $30,000 an acre may not be sustainable as a stand-alone operation, Brumley said.

"Somebody going out and trying to service $30,000 an acre debt - it's pretty difficult on a sustained basis to do that," he said.

However, he said it might make sense to a farmer who could average the land cost against other holdings.

Edwards said current average land prices can still be sustained over the long run, but not if they continue to rise.

"It's moving in that direction to where these prices are out of control for this land," he said.

"Hopefully, the market is smart enough to control itself and stay at a sustainable level," Edwards said.

Brumley said a decline in commodity prices for grain or walnuts or almonds could trigger a downturn in land value.

Some sort of correction should be expected, Crowder cautioned.

"Do we expect things to stay at this level of prices indefinitely? No. Historical averages don't suggest that," he said. "There are going to be adjustments."

That could come if interest rates go up, "which we officially think may happen later next year," Crowder said. Or market prices, water supply restrictions or other factors could come into play.

Could farmland prices collapse?

"We don't think you'll see a crash; this is not the '80s," Crowder said, referring to a previous price bubble for California farmland.

Brumley agreed.

"I honestly don't think it's a bubble. There may be a correction, but that's going to be based on commodity prices and the cost of money," he said.